economic survey part3

Public Finance CHAPTER

3

The fiscal outcome of the Central government in 2012-13 so far indicates significantimprovement over 2011-12. The fiscal outcome in 2011-12 was affected bymacroeconomic developments of growth slowdown, high global crude oil prices,and sluggish financial market conditions for effecting the budgeted disinvestmentprogramme. These developments continued through the first half of the current year.The government then pushed harder for reforms. An initial step was to set up theKelkar Committee. Following its recommendations, the government unveiled a revisedfiscal consolidation roadmap. The fiscal position of states has continued to progresswith fiscal deficit budgeted at 2.1 per cent of gross domestic product (GDP). Stayingon the indicated fiscal consolidation path is critical to sustaining the desirablemacroeconomic outcomes not only in terms of higher growth in real GDP and lowerinflation, but also in easing the financing of the widening current account deficit(CAD), for which India’s sovereign credit rating is important. Widening of the taxbase and prioritization of expenditure are key factors in effecting the desired reductionin the Central government’s fiscal deficit over the medium term, and in reducing thekey risks to fiscal marksmanship (the difference between actual outcomes andbudgetary estimates as a proportion of GDP).

3.2 Latest available data indicate nascent signsof a turnaround in the macroeconomic environment.The stress witnessed in 2011-12 continued throughthe first half of the current year delaying the recoveryprocess. This was manifest with growth continuingto be below 5.5 per cent, inflation moderatingsomewhat but continuing to be above 7 per cent,and only a brief moderation in the global crude oilprices. A pickup in financial markets, which gainedsteam as reforms were rolled out, the moderationin WPI inflation to 6.6 per cent in January 2013 anda bottoming out of industrial slowdown are broadindications of the turnaround. Indicating the trendsin fiscal outcome in the first half of the current fiscal,the Mid-Year Economic Analysis 2012-13, pointedout that the mid-year threshold benchmarks in termsof fiscal responsibility and budget management(FRBM) rules had not been met and with thecorrective measures proposed, fiscal deficit waslikely to exceed budget estimates by 0.2 percentage

point. The seriousness of the challenge can be seenby comparing the assumptions that were madewhen the Budget was presented with the actualoutcome so far.

3.3 The Budget for 2012-13 was presented on16 March 2012 in an atmosphere of uncertaintyabout the global and domestic economic outlook.The continued high levels of global crude oil pricesand domestic pressures that were manifest inpersistent inflation, which necessitated keepinginterest rates high, had their impact on aggregatedemand (both consumption and investment). TheBudget for 2012-13 attributed India’s growthslowdown in 2011-12 to weak industrial growth andunderscored the recovery in core sectors at thattime which was seen as a sign of gradual recovery.Real GDP thus was projected to grow at around7.6 per cent with inflation moderating on year-on-year basis. The fiscal slippage in 2011-12 was due

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57Public Finance

to lower realization in direct tax revenues and underprovisioning of subsidies. Recognizing the need forfunding the higher levels of outgo on subsidies onaccount of elevated levels of global crude oil prices,higher provision was made for the same in Budget2012-13. However, as part of the fiscal consolidationprocess, the Budget also announced the intent torestrict expenditure on central subsidies to under2 per cent of GDP.

3.4 The Budget for 2012-13 introducedamendments to the FRBM Act as part of the FinanceBill. These amendments contained two importantfeatures of expenditure reforms. First is theintroduction of the concept of effective revenuedeficit, which excludes from the conventional revenuedeficit, grants for the creation of capital assets. Thisis an important development for the reason that whilethe revenue deficit of the consolidated generalgovernment fully reflects total capital expenditureincurred, in the accounts of the centre, thesetransfers are shown as revenue expenditure.Therefore the mandate of eliminating the conventionalrevenue deficit of the centre becomes problematic.With this amendment, the endeavour of thegovernment under the FRBM Act would be toeliminate the effective revenue deficit. Similarly, atstate level also, some of the capital transfers tolocal bodies or parastatals could get reflected asrevenue expenditure. By understating capitalexpenditure, this might lead to a divergence betweenthe national accounts data on capital formation onthe government accounts and the conventional publicfinance data that is gleaned from the Budgets.

3.5 The second important feature is theintroduction of the provision for 'Medium TermExpenditure Framework Statement’ in the FRBMAct. This medium-term framework provides for rollingtargets for expenditure, imparting greater certainty,and encourages prioritization of expenditure.Together with the measures proposed to raise thetax-GDP ratio, the expenditure reforms are expectedto yield better fiscal marksmanship, therebymitigating key fiscal risks.

FISCAL MARKSMANSHIP

3.6 Post the FRBM Act but prior to global financialcrisis, significant fiscal consolidation was achievedwith the fiscal deficit of the centre declining rapidlyto 2.5 per cent of GDP in 2007-8, which was muchbelow the threshold target of 3 per cent set in the

FRBM Act (Table 3.1). However, the government’sfiscal policy is evaluated not only on overall fiscalmarksmanship in terms of fiscal and revenue deficitswhich are in effect-derived indicators, but also onmarksmanship in terms of key revenue andexpenditure targets.

3.7 It is useful to note that in the immediate post-FRBM period, fiscal marksmanship of the centralgovernment had a series of overperformances to itscredit except in 2008-9 and in 2011-12(Figure 3.1). While the overshooting of the deficittargets in 2008-9 was a conscious decision toobviate the adverse impact of the global financialcrisis, the large slippage in 2011-12 owed to aconfluence of adverse economic outcomes arisingfrom global and domestic factors. It was on accountof lower receipts (which explains about 58 per centof total slippage) due to a sharp deceleration in realGDP growth, particularly in the industry sector,elevated levels of inflation, subdued financial marketconditions for generating the required disinvestmentreceipts, and overshooting of expenditure(accounting for the remaining 42 per cent of slippage)mainly on account of persistently high levels of globalcrude oil and fertilizer prices which were not passedthrough to the domestic price setting. Thus the risks

Table 3.1 : Trends in Deficits of CentralGovernment

Year Revenue Fiscal Primary RevenueDeficit Deficit Deficit Deficit as

per centof Fiscal

Deficit

(As per cent of GDP) Enactment of FRBM 2003-4 3.5 4.3 0.0 79.7 2004-5 2.4 3.9 0.0 62.3 2005-6 2.5 4.0 0.4 63.0 2006-7 1.9 3.3 -0.2 56.3 2007-8 1.1 2.5 -0.9 41.4 2008-9 4.5 6.0 2.6 75.2 2009-10 5.2 6.5 3.2 81.0 2010-11 3.2 4.8 1.8 67.5 2011-12(BE) 3.4 4.6 1.6 74.4 2011-12(P) 4.3 5.7 2.6 75.5 2012-13(BE) 3.5 5.1 1.9 68.2

Sources : Union Budget documents and ControllerGeneral of Accounts.BE : Budget Estimates.P: Provisional Actuals (Unaudited).Notes: The ratios to GDP at current market prices (CMP)

are based on the Central Statistics Office’s (CSO)National Accounts 2004-5 series.


58 Economic Survey 2012-13

to the fiscal outcome are in realizing the budgetedrevenues and underprovisioning of key expenditureitems; both of which were exacerbated in 2011-12and 2012-13 (April-September).

3.8 Fiscal outcome is also affected by theunderlying assumption regarding the nominal GDP.Declining fiscal deficit as a ratio of GDP may be anoutcome of either declining growth of fiscal deficitover time or increasing growth of GDP over time orboth. In the post-FRBM period prior to 2008-9, thedeclining fiscal deficit to GDP ratio was mainly anoutcome of a decline in the growth of the fiscal deficit(Table 3.2). In the year 2011-12 a suddenovershooting of the growth of the fiscal deficit ascompared to growth in GDP over the previous yearcaused a higher fiscal deficit to GDP ratio.

NON-DEBT RECEIPTS

3.9 At the time of the annual budget, fiscaladjustment is essentially about the assumptionsregarding the growth in total non-debt receipts andtotal expenditure of the Central government. TheBudget for 2012-13 envisaged a growth of 22.7 percent in non-debt receipts (revenue receipts plus non-debt capital receipts) and in total expenditure of13.1 per cent over 2011-12 (revised estimates [RE]).Revenue receipts were estimated at ̀ 9,35,685 crorein BE 2012-13, which comprised net tax revenue of` 7,71,071 crore and non-tax revenue of` 1,64,614 crore. Together with recoveries of loansof ` 11,650 crore and disinvestment receipts of ̀ 30,000 crore, the Budget for 2012-13 placed non-debt receipts for the year at ̀ 9,77,335 crore. Beforeevaluating the assumptions for the current fiscal, itwould be instructive to analyse the outcome in2011-12 vis-à-vis assumptions behind the 2011-12(budget estimates [BE]).

3.10 The Budget for 2011-12 had estimated a year-on-year growth of 3.6 per cent in non-debt receiptscomprising a growth of 18.5 per cent in gross taxrevenue and (-) 43.0 per cent in non-tax revenueover 2010-11 (RE). After adjusting for onetimereceipts from the auction of 3G-spectrum in2010-11(RE), year-on-year growth in 2011-12 (BE)of non-debt receipts and non-tax revenue wereplaced at 19.1 per cent and 9.9 per cent respectively.The actual outcome as per the provisional data ofthe Controller General of Accounts indicates a growthof (-)3.3 per cent, 13.2 per cent and (-) 43.5 percent in 2011-12 for non-debt receipts, gross taxrevenue, and non-tax revenue respectively over2010-11(RE). Adjusting for onetime receipts of

Table 3.2 : Trends in Fiscal Deficit andGDP

Year Fiscal Growth GDP at GrowthDeficit in Fiscal current in

Deficit market GDPprices

( `̀̀̀̀ crore)(Per cent) ( `̀̀̀̀ crore)(Per cent)

2004-5 125794 2.0 3242209 14.2 2005-6 146435 16.4 3693369 13.9 2006-7 142573 -2.6 4294706 16.3 2007-8 126912 -11.0 4987090 16.1 2008-9 336992 165.5 5630063 12.9 2009-10 418482 24.2 6477827 15.1 2010-11 373592 -10.7 7795314 20.3 2011-12(P) 509732 36.4 8974947 15.1 2012-13(BE) 513590 0.8 10028118 11.7

Sources : Union Budget documents and ControllerGeneral of Accounts and Central Statistics Office.BE : Budget Estimates.P: Provisional Actuals (Unaudited).


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auction of 3G-spectrum in 2010-11(RE), year-on-year growth in 2011-12 (Provisional Actuals) ofnon-debt receipts and non-tax revenue are placedat 11.2 per cent and 8.9 per cent respectively.

3.11 While the BE had estimated revenue receiptsat ` 7,89,892 crore and total expenditure at` 12,57,729 crore, the provisional actuals were` 7,56,193 crore and ̀ 12,98,444 crore respectively,leaving a fiscal deficit of ̀ 5,09,732 crore as against` 4,12,817 crore budgeted (Appendix Table 2.19).As indicated earlier, the actual fiscal outcome wasaffected by certain adverse macroeconomicdevelopments in 2011-12. A somewhat longer-horizon analysis of the growth in non-debt receiptsand expenditure indicates a mixed outcome. A widegap can be observed between the non-debt receiptsto GDP ratio and total expenditure to GDP ratiowhich essentially reflects the extent of the fiscaldeficit (Table 3.3). As a proportion of GDP, totalexpenditure in the post crisis period is significantly

lower [Figure 3.2(a)]. On the other hand, non-debtreceipts to GDP ratio remained volatile in the postcrisis period, it has nonetheless been estimated toimprove in 2012-13 (BE) as compared to the previousyear. It is further to be observed that since 2008-9the growth of total expenditure has been generallydeclining except for the BE of 2012-13. The highergrowth of total expenditure in 2012-13 (BE) wouldhave to be compensated by much higher growth inrevenue receipts [Figure 3.2(b)]. This would in effectmean a higher tax buoyancy which was premisedon a turnaround in macroeconomic environmentenvisaged at the time of BE 2012-13.

3.12 Tax buoyancy is a measure of theresponsiveness of tax receipts with respect to GDPor National Income. A tax is buoyant when revenuesincrease by more than 1 per cent for a 1 per centincrease in GDP. In the post FRBM period, bothdirect and indirect taxes remained buoyant exceptin the crisis years (2008-9 and 2009-10) and

Table 3.3 : Receipts and Expenditure of the Central Government

2007-8 2008-9 2009-10 2010-11# 2011-12 2011-12 2012-13(BE) (P) (BE)

(As per cent of GDP)

1. Revenue receipts (a+b) 10.9 9.6 8.8 10.1 8.8 8.4 9.3(a) Tax revenue (net of states’ share) 8.8 7.9 7.0 7.3 7.4 7.0 7.7(b) Non-tax revenue 2.1 1.7 1.8 2.8 1.4 1.4 1.6

2. Revenue expenditure 11.9 14.1 14.1 13.4 12.2 12.7 12.8of which: (a) Interest payments 3.4 3.4 3.3 3.0 3.0 3.0 3.2(b) Major subsidies 1.3 2.2 2.1 2.1 1.5 1.6 1.8(c) Defence expenditure 1.1 1.3 1.4 1.2 1.1 1.1 1.1

3. Revenue deficit (2-1) 1.1 4.5 5.2 3.2 3.4 4.3 3.54. Capital receipts 3.4 6.1 7.0 5.2 5.2 6.0 5.5

of which: (a) Recovery of loans 0.1 0.1 0.1 0.2 0.2 0.2 0.1(b) Other receipts (mainly CPSEs 0.8 0.0 0.4 0.3 0.4 0.2 0.3

disinvestment)(c) Borrowings and other liabilities $ 2.5 6.0 6.5 4.8 4.6 5.7 5.1

5. Capital expenditure 2.4 1.6 1.7 2.0 1.8 1.8 2.06. Non-debt receipts 11.7 9.7 9.4 10.6 9.4 8.8 9.77. Total expenditure [2+5=7(a)+7(b)] 14.3 15.7 15.8 15.4 14.0 14.5 14.9

of which: (a) Plan expenditure 4.1 4.9 4.7 4.9 4.9 4.6 5.2(b) Non-plan expenditure 10.2 10.8 11.1 10.5 9.1 9.9 9.7

8. Fiscal deficit (7-6) 2.5 6.0 6.5 4.8 4.6 5.7 5.19. Primary deficit [8-2(a)] -0.9 2.6 3.2 1.8 1.6 2.6 1.9

Sources : Union Budget documents and Controller General of Accounts.CPSEs Central Public Sector Enterprises.# Based on provisional actuals for 2010-11. $ Does not include receipts in respect of the Market Stabilization Scheme, which will remain in the

cash balance of the central government and will not be used for expenditure.Notes : 1. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-5 series.

2. The figures may not add up to the total due to rounding/approximations.



2011-12 (Figure 3.3). During 2011-12, both directand indirect tax revenues grew at a lower rate thanwhat the BE envisaged as well as the 2010-11growth rate (Table 3.4) mainly because of economicslowdown, weak market sentiment, slow investmentgrowth, global uncertainty, and persistent highinflation. This led to a sharp fall in tax buoyancy in2011-12. The decline has been more in corporatetaxes than personal income taxes. During thisperiod, direct tax buoyancy (ratio of direct taxesgrowth to nominal GDP growth) also declined andhas been less than 1. This may be on account oflower profitability of corporates considering higherinflation.

3.13 The Budget for 2012-13 estimated higher taxrevenues on the strength of several measuresannounced like widening of the base of service taxthrough a single negative list (of exemptedcategories), a new schedule of rates and slab for

personal income tax, raising of the standard rate ofexcise duty as well as merit rates and the peakrate of customs duty of 10 per cent that had beenleft unchanged notwithstanding the pickup in importdemand. The details of the trends in differentcomponents of tax revenue and non-tax revenue arediscussed in the following paragraphs.

DIRECT TAXES

3.14 As is evident from Table 3.4, there has beena compositional change in gross tax revenues since2007-8. As a proportion of GDP, direct taxesaccounted for 5.5 per cent in 2011-12, well belowthe peak of 5.9 per cent in 2007-8. The Budget for2012-13 envisaged a growth of 13.9 per cent indirect taxes over 2011-12 (RE). Continuing with thepolicy of moderation of tax rates, the Budget hasfurther broadened the slabs for individual taxpayers.The exemption limit for individual taxpayers below


61Public Finance

the age of 60 years has been enhanced from` 1,80,000 to ̀ 2 lakh. The income slab for 20 percent tax rate has been broadened for all individualtaxpayers irrespective of their age and will now beapplicable to total income between ` 5 lakh and` 10 lakh instead of the earlier slab of ` 5 lakh and` 8 lakh. The tax rate of 30 per cent will now beapplicable to total income exceeding ` 10 lakh.Securities transaction tax on certain transactionsin specified securities has been reduced from theexisting 0.125 per cent to 0.1 per cent.

3.15 The two specific measures aimed atexpanding the direct tax base in the Budget for

2012-13 were the introduction of the provisions ofGAAR in the Income Tax Act and extending theprovisions of alternate minimum tax (AMT) to allnon-company assessees. In an environment ofmoderate rates of tax, it is necessary that the correcttax base be subject to tax in the face of aggressivetax planning and use of opaque low tax jurisdictionsfor residence as well as for sourcing capital. Theneed for making statutory provisions for codifyingthe doctrine of ‘substance over form’ has beenrealized by introducing the chapter on GAAR.However, in view of the apprehensions raised aboutthe Rules and the recommendations of the ShomeCommittee, the provisions have been deferred.

Table 3.4 : Sources of Tax Revenue

2007-8 2008-9 2009-10 2010-11 2011-12 2011-12 2012-13(BE) (P) (BE)

( `̀̀̀̀ crore)Direct (a) 295938 319859 367648 438477 525151 489312 564337Personal income tax 102644 106046 122475 139069 164526 165276 189866Corporation tax 192911 213395 244725 298688 359990 323250 373227Indirect(b) 279031 269433 244737 344530 397250 392273 504423 Customs 104119 99879 83324 135813 151700 149489 186694 Excise 123611 108613 102991 137701 163550 145205 193729 Service tax 51301 60941 58422 71016 82000 97579 124000Gross tax revenue # 593147 605299 624528 793072 932440 890622 1077611

Tax revenue as a percentage of gross tax revenue

Direct (a) 49.9 52.8 58.9 55.3 56.3 54.9 52.4Personal income tax 17.3 17.5 19.6 17.5 17.6 18.6 17.6Corporation tax 32.5 35.3 39.2 37.7 38.6 36.3 34.6Indirect(b) 47.0 44.5 39.2 43.4 42.6 44.0 46.8 Customs 17.6 16.5 13.3 17.1 16.3 16.8 17.3 Excise 20.8 17.9 16.5 17.4 17.5 16.3 18.0 Service tax 8.6 10.1 9.4 9.0 8.8 11.0 11.5

Tax revenue as a percentage of gross domestic product

Direct(a) 5.9 5.7 5.7 5.6 5.8 5.5 5.6Personal income tax 2.1 1.9 1.9 1.8 1.8 1.8 1.9Corporation tax 3.9 3.8 3.8 3.8 4.0 3.6 3.7Indirect(b) 5.6 4.8 3.8 4.4 4.4 4.4 5.0 Customs 2.1 1.8 1.3 1.7 1.7 1.7 1.9 Excise 2.5 1.9 1.6 1.8 1.8 1.6 1.9 Service tax 1.0 1.1 0.9 0.9 0.9 1.1 1.2Gross tax revenue # 11.9 10.8 9.6 10.2 10.4 9.9 10.7

Sources : Union Budget documents and Controller General of Accounts.# includes taxes referred in (a) & (b) and taxes of Union Territories and ‘other’ taxes.Notes: 1. Direct taxes also includes taxes pertaining to expenditure, interest, wealth, gift, and estate duty.

2. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-5series.



3.16 Besides the above, in order to widen the taxbase, the provisions regarding AMT have beenextended to all non-company assessees and it isprovided that a person other than a company thathas claimed deduction under any section (other thansection 80P) included in Chapter VI-A under theheading 'C – Deductions in respect of certainincomes’ or under section 10AA, shall be liable topay AMT at the rate of 18.5 per cent. In order tobring about greater certainty and to reduce litigationin matters related to transfer pricing and internationaltaxation, the advance pricing agreement (APA)scheme has been notified. APA is an agreement inadvance between a taxpayer and the revenuedepartment on an appropriate transfer-pricingmethodology for a set of transactions over a fixedperiod of time in the future. APAs therefore offer

better assurance on transfer-pricing methods andare conducive for providing certainty and unanimityof approach.

3.17 The modernization of the business processesof the tax administration through extensive use ofinformation technology is continuing, viz. along withe-filing of income tax returns, various forms, auditreports, and statements of tax deduction at sourcehave been made compatible with electronic filingand computerized centralized processing. Thesemeasures would enable tax administration to functionin a more efficient and automated environment.

INDIRECT TAXES

3.18 The Budget for 2012-13 estimated revenuefrom indirect taxes to grow by 26.7 per cent over

Box 3.1 : Sector-Specific Proposals in Central Excise1. CEMENT: The excise duty structure on cement manufactured and cleared in packaged form rationalized. The graded

retail selling price (RSP) slabs for the purpose of charging of duty on cement manufactured and cleared in packagedform done away with. The duty rates on cement and cement clinkers revised as follows:

Description Revised rate of duty1. Cement manufactured and cleared in packaged form:-

(a) from mini cement plants 6% + ` 120 per tonne(b) from other than mini cement plants 12% + ` 120 per tonne

2. Cement cleared other than in packaged form. 12%3. Cement clinker 12%

Cement also notified under section 4A, that is RSP-based assessment with an abatement of 30 per cent on RSP.

2. PRECIOUS METALS: (i) Excise duty on gold jewellery sold from export-oriented units (EOUs) into domestic tariffarea (DTA) increased from 5 per cent to 10 per cent; (ii) Excise duty on refined gold increased from 1.5 per cent to 3per cent; (iii) Excise duty on gold produced from copper smelting increased from 2 per cent to 3 per cent; (iv) Exciseduty on silver produced from copper smelting reduced from 6 per cent to 4 per cent; (v) Gold coins of 99.5 per cent andabove purity and silver coins of 99.9 per cent and above purity manufactured out of duty paid gold fully exemptedfrom excise duty; (vi) Articles of gold /silver jewellery exempted from excise duty.

3. MASS CONSUMPTION ITEMS: (i) Refills and inks used for the manufacture of writing instruments of value notexceeding ` 200 per piece fully exempted from excise duty subject to actual user condition;(ii) Exemption limit onfootwear enhanced from ` 250 per pair to ̀ 500 per pair. Footwear above ̀ 500 per pair to attract excise duty of 12 percent; (iii) Excise duty on iodine reduced from 10 per cent to 6 per cent.

4. ENVIRONMENT-FRIENDLY GOODS: (i) Excise duty reduced from 10 per cent to 6 per cent on battery packssupplied to manufacturers of electric vehicles for use as spares and original equipment manufacturers subject to end-use condition; (ii) Excise duty reduced from 10 per cent to 6 per cent on specific parts of hybrid vehicles supplied tomanufacturers of hybrid vehicles subject to end-use condition; (iii) Excise duty on LED lamps reduced to 6 per cent.

5. PETROLEUM: The rate of cess leviable on indigenous petroleum crude oil under the Oil Industry (Development) Act1974 increased from ` 2500 per metric tonne to ` 4500 per metric tonne.

6. TEXTILES: For the purpose of charging excise duty on ready-made garments bearing a brand name or sold under abrand name, the level of abatement from RSP increased from 55 per cent to 70 per cent.

7. MISCELLANEOUS: (i) Full exemption from excise duty provided to food preparations containing fruits and vegetablesfalling under Chapter 20, which are prepared in a hotel, restaurant, or retail outlet, whether or not such food isconsumed in such hotels/restaurants/retail outlets; (ii) The composite rate applicable to automobile chassis convertedinto an ad valorem rate and fixed at 14 per cent for diesel driven buses, lorries, and trucks; (iii) Excise duty on parts ofmobile phones, other than those cleared to a manufacturer of mobile phones, reduced from 10 per cent to 2 per cent,provided no Cenvat credit is taken; (iv) Excise duty reduced from 10 per cent to 6 per cent on matches manufacturedby semi-mechanized units and processed food products of soy; (v) Full exemption from excise duty withdrawn frommega/ultra mega power projects except 113 specified projects.


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2011-12 (RE) on the strength of assumed economicrecovery. In so far as union excise duties areconcerned, the BE 2012-13 envisaged a growth of29.1 per cent in revenue over 2011-12 (RE). Anincrease in the effective rate of excise duty onnon-petroleum products from 10 per cent earlier to12 per cent in BE 2012-13 and a pickup in themanufacturing sector were the bases for theseassumptions. The Budget for 2012-13 also madethe following other changes: raised the concessionalrate of excise duty on non-petroleum products from5 per cent to 6 per cent; increased the lower rate onnon-petroleum products without Cenvat Credit from1 per cent to 2 per cent with the exception of coaland fertilizers; enhanced the rate of excise duty from22 per cent to 24 per cent and from '22 per cent+` 15,000 per vehicle’ to 27 per cent on certaincategories of automobiles; increased the rates ofspecific excise duty on cigarettes (both filter andnon-filter) of length exceeding 65mm; raised theexcise duty on cigars, cheroots, and cigarillos to'12 per cent or ̀ 1,370 per thousand, whichever is

higher’; increased the basic excise duty on hand-rolled bidis from ` 8 to ` 10 per thousand and onmachine-rolled bidis from `19 to ` 21 perthousand (See Box 3.1 for sector-specificdetails).

3.19 In so far as revenue from customs isconcerned, the Budget for 2012-13 envisaged agrowth of 22.0 per cent over 2011-12 (RE). The twoimportant general reductions in customs duties werethe exemption of education cess and secondaryand higher education cess from the CVD portion ofcustoms duty so as to avoid computation of suchcesses twice; the duty-free allowance under thebaggage rules has been increased for adultpassengers of Indian origin from ` 25,000 to` 35,000 (returning after stay abroad of more thanthree days) and from ̀ 12,000 to ̀ 15,000 (returningafter stay abroad of three days or less). Continuingwith the practice of sectoral changes in duty rates,Budget 2012-13 announced many sector-specificmeasures (Box 3.2).

Box 3.2 : Sector-specific changes in Customs:1. AGRICULTURE/AGRO PROCESSING/PLANTATION SECTOR: (i) Basic customs duty on sugarcane planter, root

or tuber crop-harvesting machine and rotary tiller and weeder and parts and components for their manufacture reducedfrom 7.5 per cent to 2.5 per cent; (ii) At present, project import status available for installation of mechanized handlingsystems and pallet racking systems in mandis or warehouses for foodgrains and sugar, with concessional rate of basiccustoms duty of 5 per cent. Such systems also exempt from additional duty of customs (CVD) and special additionalduty of customs (SAD). The same dispensation extended to such systems installed in mandis or warehouses forhorticultural produce; (iii) Project import status granted to greenhouses set up for protected cultivation of horticultureand floriculture produce with concessional basic customs duty of 5 per cent; (iv) Basic customs duty reduced from 10per cent/7.5 per cent to 5 per cent (until March 2014) on specified coffee plantation and processing machinery;(v) Basic customs duty reduced from 10 per cent to 5 per cent (until March 2014) on coffee brewing and vendingmachines (commercial type). Basic customs duty also reduced to 2.5 per cent on parts required for manufacture of suchcoffee- brewing and -vending machines; (vi) Basic customs duty reduced on specified soluble fertilizers and liquidfertilizers, other than urea, from 7.5 per cent to 5 per cent and from 5 per cent to 2.5 per cent respectively.

2. AUTOMOBILES: Basic customs duty on completely built units (CBUs) of large cars/ MUVs/ SUVs permitted forimport without type approval (value exceeding US $ 40,000 and engine capacity exceeding 3000 cc for petrol and 2500cc for diesel) increased from 60 per cent to 75 per cent.

3. METALS: (i) Basic customs duty on coating material for manufacture of electrical steel reduced from 10 per cent to 5per cent subject to actual user condition; (ii) Basic customs duty on ammonium meta-vanadate used in the manufactureof ferro-vanadium reduced from 7.5 per cent to 2.5 per cent; (iii) Nickel oxide/ hydroxide and nickel ore/ concentratefully exempted from basic customs duty; (iv) Exemption from SAD currently available to CRGO steel restricted toprime quality of such steel; (v) Basic customs duty on flat rolled products (HR and CR) of non-alloy steel increased from5 per cent to 7.5 per cent.

4. PRECIOUS METALS: (i) Basic customs duty on standard gold bars and platinum increased from 2 per cent to 4 percent; (ii) Basic customs duty on non-standard gold increased from 5 per cent to 10 per cent; (iii) Additional customsduty on gold ore/concentrate and bars for refining increased from 1 per cent to 2 per cent; (iv) Basic customs duty of 2per cent imposed on cut and polished coloured gemstones.

5. CAPITAL GOODS/INFRASTRUCTURE: (i) Basic customs duty on capital goods, plant, and equipment importedfor setting up or substantial expansion of iron ore pellet plants or iron ore beneficiation plants reduced from 7.5 per centto 2.5 per cent; (ii) Full exemption from basic customs duty until March 2015 provided for initial setting up andsubstantial expansion of fertilizer projects; (iii) Steam coal fully exempted from basic customs duty. CVD reducedfrom 5 per cent to 1 per cent on such coal (valid up to 31.3.2014); (iv) Natural gas/liquefied natural gas imported forpower generation by a power generation company fully exempted from basic customs duty; (v) Full exemption from

(Contd...)



basic customs duty provided to uranium concentrate, sintered natural uranium dioxide, sintered uranium dioxidepellets for generation of nuclear power; (vi) Full exemption from basic customs duty, CVD and SAD extended toequipment imported for road construction projects awarded by metropolitan development authorities; (vii) Full exemptionfrom basic customs duty and CVD presently available to tunnel boring machines and parts for hydel and road projectsextended to all infrastructure projects without end-use condition; (viii) Full exemption from basic customs duty andCVD extended to tunnel excavation and specified lining equipment also; (ix) Full exemption from basic customs dutyextended to coalmining projects; (x) Basic customs duty for machinery and instruments for surveying and prospectingreduced and unified at 2.5 per cent; (xi) Basic customs duty on railway safety (train protection and warning system)equipment and railway track-laying machines reduced from 10 per cent to 7.5 per cent.

6. AIRCRAFT AND SHIPS: (i) Full exemption from basic customs duty and CVD provided to new and retreaded aircrafttyres; (ii) Full exemption from basic customs duty and CVD extended to parts of aircraft and testing equipment formaintenance and repair of aircraft imported by maintenance, repair, and overhaul (MRO) units; (iii) Customs duties onforeign-going vessels on conversion for coastal trade now to be charged on proportionate basis depending on the periodfor which they operate as coastal vessels in India; (iv) Full exemption from SAD extended to import of dredgers.

7. ENVIRONMENT PROTECTION: (i) Equipment for setting up of solar projects fully exempted from SAD; (ii)Concessional rate of 5 per cent basic customs duty extended to raw materials for the manufacture of intermediates,parts, and sub-parts of blades for rotors for wind energy generators; (iii) Full exemption from basic customs dutyextended to tri band phosphor for use in the manufacture of compact fluorescent lamps; (iv) Full exemption from basiccustoms duty and SAD along with 6 per cent CVD available to specified parts for the manufacture of hybrid vehiclesextended to some additional parts; (v) The customs duty regime of 6 per cent CVD and nil SAD extended to lithium ionbatteries for the manufacture of battery packs for supply to electric or hybrid vehicle manufacturers.

8. HEALTH/NUTRITION: (i) Basic customs duty reduced from 5 per cent to 2.5 per cent on iodine; (ii) Basic customsduty reduced on isolated soya protein and soya protein concentrate from 15 per cent and 30 per cent respectively to 10per cent; (iii) Basic customs duty reduced from 10 per cent to 5 per cent on probiotics; (iv) Customs duty on six specifiedlifesaving drugs/vaccines and their bulk drugs reduced from 10 per cent to 5 per cent with nil CVD; (v) A concessionalimport duty regime of 2.5 per cent basic customs duty with 6 per cent CVD/excise duty and nil SAD prescribed forspecified raw materials for the manufacture of syringes, needles, catheters, cannulas subject to actual user condition.(vi) A concessional import duty regime of 2.5 per cent basic customs duty with 6 per cent CVD and nil SAD extendedto parts and components for the manufacture of blood pressure monitors and blood glucose monitoring systems(glucometers); (vii) Full exemption from basic customs duty and CVD extended to steel tube and wire, cobalt chromiumtube, Hayness Alloy-25, and polypropylene mesh for the manufacture of coronary stents/coronary stent systems andartificial heart valves subject to actual user condition.

9. TEXTILES: (i) Basic customs duty on new shuttle-less looms, along with parts and components for their manufacturereduced from 5 per cent to nil; (ii) Basic customs duty on new automatic silk-reeling and -processing machinery and rawsilk testing equipment reduced from 5 per cent to nil; (iii) The concessional rate of basic customs duty of 5 per centrestricted only to new textiles machinery; (iv) Basic customs duty on wool waste and wool tops reduced from 10 percent and 15 per cent respectively to 5 per cent; (v) Basic customs duty on titanium dioxide reduced from 10 per cent to7.5 per cent; (vi) Full exemption from basic customs duty extended to Aramid yarn and fabric when used in themanufacture of bulletproof helmets for supply to defence and police.

10. ELECTRONICS/ HARDWARE: (i) Full exemption from basic customs duty provided to LCD and LED TV panels of19 inches and above; (ii) LEDs required for the manufacture of LED lamps exempted from SAD; (iii) The scope of fullexemption from basic customs duty, CVD, and SAD extended to parts of memory cards until March 2013; (iv) Fullexemption from basic customs duty currently available to copper, brass, phosphor bronze strips, and similar itemsimported for the manufacture of connectors withdrawn; (v) Full exemption from basic customs duty currently availableto poly-laminated aluminum tape and poly-laminated steel tape if imported for the manufacture of cables andconductors for telecom use withdrawn.

11. EXPORT PROMOTION: (i) Basic customs duty reduced from 10 per cent to 5 per cent on marine seawater pumps withfibre impellers and automatic fish/prawn feeders for aquaculture; (ii) Basic customs duty on artemia reduced from 30per cent to 5 per cent.

12. PAPER: Waste paper fully exempted from basic customs duty.

13. SAD: Brass scrap and timber logs fully exempted from SAD.

14. MISCELLANEOUS: (i) A basic customs duty of 10 per cent imposed on digital still cameras of certain specifications;(ii) Basic customs duty on boric acid increased from 5 per cent to 7.5 per cent; (iii) Basic customs duty on boiler qualitytubes and pipes for the manufacture of boilers reduced from 10 per cent to 7.5 per cent subject to end-use condition; (iv)A concessional customs duty of 5 per cent basic customs duty + 6 per cent CVD+ nil SAD prescribed for imports ofhydrophilic non-woven, hydrophobic non-woven, and super absorbent polymer for manufacture of adult diaperssubject to actual user condition; (v) Full exemption from customs duty withdrawn from mega/ultra mega powerprojects except 113 specified projects.

Box 3.2 : Sector-specific changes in Customs: (Contd..)


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COLLECTION RATES

3.20 Given the large number of exemptions to theapplication of statutory rate of customs, the increasein value of imports does not necessarily imply similarmagnitude in customs revenue. Collection rates arean indicator of overall incidence of customs tariffsincluding countervailing and special additional dutiesof imports. These are computed as the ratio ofrevenue collected from these duties to the aggregatevalue of imports in a year (or period) and thusrepresent trade-weighted tariffs. The trends in therates for important commodity groups as well as forall commodities taken together over the years areshown in Table 3.5. A major reason for the fall inrates has been the lower levels of duties on manyitems including on petroleum, oil, and lubricants(POL), which has significant import value and ofcourse the impact of the various exemptions. Atoverall level, the effective rate of taxes at around 6per cent in 2011-12 as against the level of simpleaverage tariff rates of basic customs duties and theCVD indicates the impact of exemptions.

SERVICE TAX

3.21 In 2011-12, growth in service tax revenue was37.4 per cent amounting to ` 97,579 crore, which

indicated that service tax has been emerging as animportant source of revenue. Budget 2012-13envisaged a growth of 30.5 per cent in the revenuefrom service tax vis-à-vis 2011-12 (RE). This wasbased on the increase in the rate from the existing10 per cent to 12 per cent and a change in the taxbase (Table 3.6). As against the usual practice ofexpanding the list of services, the Budget for2012-13 introduced a 'negative list’ approach effective1 July 2012. For operationalizing the negative listapproach, a number of changes have been made inChapter V of the Finance Act 1994 (when servicetax was initially introduced). Service of transportationof passengers with or without accompaniedbelongings by railways in first class or an airconditioned coach and services by way oftransportation of goods by railways has beensubjected to service tax effective October 1, 2012.Following the revision in the rate of service tax,changes have also been made in specific andcompounding rates of tax for services in relation topurchase and sale of foreign currency includingmoney changing; promotion, marketing, organizing,or in any manner assisting in organizing lottery; andreversal of Cenvat credit under rule 6(3)(i).

3.22 A number of amendments in the Finance Act1994 and changes in the rules governing the levy of

Table 3.5 : Collection Rates for Selected Import Groups*(in per cent)

Sl. Commodity 2006-7 2007-8 2008-9 2009-10 2010-11 2011-12No. Groups

I POL 5 6 3 2 6 3II Non-POL 12 13 9 8 9 7

of which:1. Food products 23 19 4 3 3 32. Chemicals 22 22 16 14 17 143. Man-made fibres 28 30 17 22 30 224. Paper & newsprint 10 10 8 8 8 75. Natural fibres 12 13 6 4 5 36. Metals 24 24 17 17 22 207. Capital goods 14 16 13 11 13 128. Others 6 6 4 4 4 4

III Total 10 10 7 6 8 6

Source : Department of Revenue, Ministry of Finance* Collection rate is defined as the ratio of revenue collection (basic customs duty + countervailing duty) to value of importsunadjusted for exemptions, expressed in percentage.

Notes : S.No. 1 includes cereals, pulses, tea, milk and cream, fruits, vegetables, animal fats, and sugar.S.No. 2 includes chemical elements, compounds, pharmaceuticals, dyeing and colouring materials, plastic, and rubber.S.No. 4 includes pulp and waste paper, newsprint, paperboards and manufactures, and printed books.S.No. 5 includes raw wool and silk. S.No. 6 includes iron and steel and non-ferrous metals.S.No. 7 includes non-electronic machinery and project imports, electrical machinery.



service tax have been made. These include: thePlace of Provision of Service Rules 2012; new reversecharge mechanism; Cenvat Credit Rules 2004;Service Tax Rules 1994; and Point of Taxation Rules2011 (Box 3.3).

TAX EXPENDITURE

3.23 There is significant divergence between thestatutory rates of taxes as notified in the variousschedules and the actual or effective rate of taxation,which is essentially a simple ratio of tax revenuecollected to the tax base. This arises on account ofthe exemptions to the tax rate specified in theschedule. As indicated earlier in the section oncollection rates, the magnitude of revenue foregone(tax expenditure) is indeed high. In the ReceiptsBudget for 2012-13, tax foregone on account ofexemptions under corporate income tax for2010-11 and 2011-12 was estimated at ` 57,912crore and ̀ 51,292 crore respectively net of MAT. Inthe case of corporate taxpayers, deduction onaccount of accelerated depreciation, deduction forexport profits of export-oriented units located inspecial economic zones (SEZs) and profits ofbusinesses in the power and telecom sectors weresome of the major incentives. The absolute amountof deductions has decreased as a result of phasingout of profit-linked deductions. Further, the levy of

MAT has led to a higher effective rate of taxation inthe case of corporates from 20.55 per cent for2006-7 to 24.1 per cent for financial year 2010-11.Tax forgone on account of exemptions underpersonal income tax for individual taxpayers wasestimated at ` 30,653 crore and ` 35,698 crorerespectively in 2010-11 and 2011-12. The bulk ofthe revenue foregone under personal income tax wason account of the exemptions given for certaininvestments and payments under section 80 C ofthe Income Tax Act.

3.24 In so far as indirect taxes are concerned,revenue forgone is defined as the difference betweenduty that would have been payable but for the issueof exemption notification and actual duty paid interms of the relevant notification. The revenue forgonefor financial year 2011-12 in respect of excise dutiesis estimated at ̀ 2,12,167 crore including ̀ 12,880crore on account of area-based exemptions. Dutyforgone for the year 2010-11 on account of all theexemption notifications on customs was estimatedat ` 2,30,131 crore as against the duty forgone of` 2,33,950 crore in 2009-10. This is projected to riseto ` 2,76,093 crore in 2011-12. All these estimatesare based on certain assumptions and have to beinterpreted with caution and the actual outcome indynamic markets with different elasticities fordifferent products may turn out to be very different.

Table 3.6 : Service Tax: A Growing Revenue Source

Year No. of services Tax rate in Revenue Growth overper cent (` crore) previous

year in per cent

2004-5 75 10 14200 80.0

2005-6 78 10 23055 62.4

2006-7 92 12 37598 63.1

2007-8 98 12 51301 36.4

2008-9 106 12* 60941 18.8

2009-10 109 10 58422 -4.1

2010-11 117 10 71016 21.6

2011-12(P) 119 10 97579 37.4

2012-13 Negative list# 12 80927 33.0(April- December)@

Source : Receipts Budget and Controller General of Accounts.* Reduced to 10% w.e.f. 24 February 2009.@ Growth for 2012-13 (April-December) is over corresponding period previous year.# Shifted to negative list approach w.e.f 1 July 2012.


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Box 3.3 : Changes in Service Tax1. PLACE OF PROVISION OF SERVICES RULES 2012: An important component of the changes is the introduction of

the Place of Provision of Services Rules 2012. The new rules have replaced the existing Export of Services Rules 2005 andthe Taxation of Services (Provided from Outside India and Received in India)Rules 2006. Rule 5 of the export rules hasbeen incorporated in Service Tax Rules.

2. AMENDMENTS IN THE FINANCE ACT 1994: Chapter V of the Finance Act 1994 has been amended to: (i) Prescribethat the value of taxable service (particularly in the case of import and export of taxable services)and the rate of taxshall be determined in terms of Point of Taxation Rules 2011; (ii) Introduce provisions relating to special audit in theservice tax law on the lines of the Central Excise Act 1944. Now special audit can be ordered under specified circumstances.Consequently, section 14AA has been omitted from section 83; (iii) Increase the one-year time limit for issuance ofnotice for specified category of offences prescribed under section 73(1)of the Finance Act 1994 to 18 months. A new sub-section (1A)has been inserted in section 73 of the Finance Act 1994 to prescribe that follow-on notices issued on the samegrounds need not repeat the grounds but only state the amount of service tax chargeable for the subsequent period.Statement of tax due for the subsequent period, served on the assessees with reference to the earlier demand notice, willbe deemed as a notice under section 73(1)of the Finance Act 1994; (iv) Make Settlement Commission provisionsapplicable to service tax in line with the similar provisions contained in the Central Excise Act 1944; (v) Make therevision mechanism prescribed in section 35EE of the Central Excise Act 1944 applicable to service tax to the extentpossible; (vi) Amend sections 85 and 86 on the lines of sections 35 and 35E of the Central Excise Act so as to harmonizethe limitation for filing assessee's appeal before Commissioner (Appeals)and revenue appeal before the Tribunal; (vii)Obtain powers (a) to provide for the manner of compounding and to specify the amount of compounding of offencesalong the lines of Central Excise (Compounding of Offences)Rules 2005; (b) to provide for rules for settlement of casesalong the lines of Central Excise.

3. NEW REVERSE CHARGE MECHANISM: (i) Section 68(2) of the Finance Act,1994 has been amended to put the onusof payment of service tax on reverse charge basis partly on service provider and partly on service receiver. The schemehas been made applicable on three specific services, i.e. hiring of means of transport; construction; and manpowersupply and security services; (ii) Consequent to the above change, suitable amendment has also been made in theconcept of 'person liable to pay' provided in Rule 2(1)(d) of Service Tax Rules 1994.

4. RENTING OF IMMOVABLE PROPERTY SERVICE: Constitutional validity of the levy of service tax on renting ofimmovable property had been the subject matter of litigation leading to pronouncement of court judgments favourableto revenue, including those of Hon'ble Delhi High Court and Hon'ble Supreme Court. Taking an overall view, thegovernment has decided to waive the penalty for those taxpayers who pay the service tax due on the renting ofimmovable property service (as on 6.3.2012), in full along with interest. For this purpose, a new section 80A has beeninserted in the Finance Act 1994. This scheme of penalty waiver was open only for a period of six months from the dateof enactment of the Finance Bill 2012.

5. AMENDMENTS IN RULES: (i) Cenvat Credit Rules 2004 have been amended as follows: (a) Existing rule 5 replacedwith a new rule to simplify the procedure for refund of unutilized credit on account of exports; (b) Credit allowed onmotor vehicles (except those under heading nos 8702, 8703, 8704, 8711 and their chassis). The credit of tax paid on thesupply of such vehicles on rent, insurance, and repair is also allowed; (c) Credit of insurance and service station serviceis allowed to insurance companies in respect of motor vehicles insured and re-insured by them; and manufacturers inrespect of motor vehicles manufactured by them; (d) Rules 4(1)and 4(2)amended to allow a service provider to takecredit of inputs or capital goods whenever the goods are delivered to him, subject to specified conditions. (e) Rule 7 forinput service distributors amended to provide that credit of service tax attributable to service used wholly in a unitshould be distributed only to that unit and that the credit of service tax attributable to service used in more than one unitshould be distributed prorata on the basis of the turnover of the concerned unit to the sum total of the turnover of allthe units to which the service relates. (f) Rule 9(1)(e)amended to allow availment of credit on the tax payment challanin case of payment of service tax by the service receiver on reverse charge basis.(ii) Service Tax Rules, 1994 has been amended as follows: (a) The time period provided in rule 4A for issuance of

invoice increased to 30 days. For banks and financial institutions providing banking and other financial services, theperiod is 45 days; (b) Rule 6(4A)amended to allow unlimited amount of permissible adjustments. (c) In case ofexport and individuals and firms rendering eight specified services, the point of taxation shifted from the Point ofTaxation Rules to the Service Tax Rules. (d) In case of exporters, the period extended by the Reserve Bank of India(RBI)on specific requests included in the period for which the tax liability is allowed to be deferred. (e) The optionof deferred payment allowed for all service providers rather than for specific services. The facility is available onlyto individuals and partnership firms (including limited liability partnership)up to a turnover of taxable services of` 50 lakh subject to the condition that their turnover of taxable services in previous year was below ̀ 50 lakh. Forcomputing the above limits, the turnover of the whole entity is required to be summed up and not any singleregistration.

(iii) Point of Taxation Rules 2011 have been amended to : (a) Change the definition of continuous supply of service tocapture the entire dimension of the concept, viz. the recurrent nature of services and the obligation for paymentperiodically or from time to time; (b) Omit rule 6 in respect of continuous supply of service and merge it with rule3. Rules 4 and 5, which deal with situations covering change in effective rate of tax and taxation of new services, arenow applicable to continuous supply of services also; (c) Define the date of payment; (d) Give an option todetermine the point of taxation in respect of advances up to ̀ 1000 received in excess of the amount indicated in theinvoice, on the basis of invoice or completion of service rather than payment; and (e) Incorporate a new residual ruleto ascertain point of taxation in cases where the same could not be ascertained by the rules prescribed.



Nevertheless, there is merit in limiting the exemptionsor their grandfathering on a case-by-case basis soas to realize fuller tax potential through a wider taxbase.

NON-TAX REVENUE

3.25 Non-tax revenues grew at a compound annualrate of 7.6 per cent in the 10 years ending 2009-10.The spurt in 2010-11 owed to higher-than-budgetedrealization from the proceeds of auction of telecom3G/broadband wireless access spectrum. As againstthe estimated revenue of ` 1,25,435 crore in2011-12 (BE), the realization fell marginally short at` 1,24,307 crore notwithstanding the fact that theauctions of telecom spectrum and phase III FM Radiowhich were to bring in ̀ 14,600 crore could not takeplace. Budget 2012-13 estimated a growth of 32.0per cent over 2011-12 (RE) in non-tax revenue mainlyon account of estimated receipts of ̀ 40,000 crorefrom the telecom spectrum auction. As the 2Gtelecom spectrum auction elicited lukewarmresponse on account of the high reserve price in thecurrent year, the government has revised thereserve price downwards. As such, the proceedsfrom this component are as yet an important risk tothe actual fiscal outcome for 2012-13.The other main component is dividends and profits,which have also in the past exhibited sluggishgrowth.

NON-DEBT CAPITAL RECEIPTS

3.26 Recoveries of loans and disinvestment arethe two key receipts of the non-debt capital variety.As against ` 16,897 crore in 2011-12 (provisionalactuals), Budget 2012-13 has placed recoveries ofloans at ̀ 11,650 crore this year. The 12th FinanceCommission’s recommendation against loanintermediation from the centre to states coupled withthe fact that such recoveries of loan have become aminor source in the receipts side has resulted indisinvestment assuming greater importance incomparison. As against ` 40,000 crore budgetedunder disinvestment in 2011-12, actual receipts were` 15,622 crore on account of the subdued financialmarket conditions. The Budget for 2012-13 hasestimated that ̀ 30,000 crore would accrue in 2012-13. In April-December 2012, receipts under this headwere ` 8,178 crore. The government has takenseveral steps to expedite the process ofdisinvestment. The Cabinet Committee on Economic

Affairs has approved disinvestment in thefollowing:—

(a) Disinvestment of 9.33 per cent paid up equityof Minerals and Metals Trading Corporation(MMTC) Ltd out of the Government of India’sholding of 99.33 per cent through an offer forsale of shares through stock exchanges, asper the Securities and Exchange Board of India(SEBI) Rules and Regulations.

(b) Disinvestment of 10 per cent paid up equity ofOil India Ltd. (OIL) out of the Government ofIndia’s holding of 78.43 per cent through anoffer for sale of shares through stockexchanges as per SEBI Rules andRegulations.

(c) Disinvestment of 12.15 per cent paid up equityin National Aluminium Company Limited.

(d) Disinvestment of 9.59 per cent equity inHindustan Copper Limited.

(e) Disinvestment of 9.50 per cent paid up equitycapital in the National Thermal PowerCorporation (NTPC) Ltd out of the Governmentof India’s shareholding of 84.50 per cent. TheCabinet Committee on Economic Affairs hasapproved disinvestment of 9.50 per cent equityof NTPC Ltd, out of its holding of 84.50 percent through an offer for sale of shares throughstock exchanges as per SEBI Rules andRegulations.

(f) Exchange-traded fund (ETF) for the stocks ofthe listed central public-sector enterprises(CPSEs) is also being proposed.

ACTUAL REVENUE OUTCOME IN2012-13 VIS-À-VIS BUDGET ESTIMATES

3.27 Against the estimated growth in non-debtreceipts discussed in the previous section in termsof various taxes, non-tax revenue, and disinvestmentreceipts, the actual outcome in the first nine monthsof the current fiscal indicates the challenge inmarksmanship for this year (Table 3.7). Gross taxrevenue in April-December 2012 has grown year-on-year by 15 per cent to reach ` 6,81,345 crore.While this level of growth is much higher than thatof 12.2 per cent in April-December 2011, it fallssignificantly short of the growth envisaged by BE2012-13. As a proportion of BE, gross tax revenue


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in April-December 2012 was 63.2 per cent, lowerthan the last five-years’ average of 69.0 per cent.This level of growth in April-December 2012 comprisesa growth of 17.4 per cent in union excise duties; 6per cent in customs; 22.5 per cent in personalincome tax; 33 per cent in service tax; and 10.6 percent in corporate income tax. In terms of the impliedyear-on-year growth envisaged by BE 2012-13 overprovisional actuals of 2011-12, there is slippage inthe first nine months of the current fiscal in corporateincome tax by 4.9 percentage points, customs by18.9 percentage points, and central excise by16 percentage points. There is overperformance inservice tax collection by 5.9 percentage points andpersonal income tax by 7.6 percentage points. Interms of overall gross tax revenue the slippage is6 percentage points in April-December 2012. Based

on the observed collection in the last quarter of theprevious year, the slippage in tax revenue collectioncould be lowered with some additional efforts.

3.28 Apart from these, non-tax revenue inApril-December 2012 is placed at ` 86,380 crore,which is 52.5 per cent of BE, well below the last fiveyears’ average. This outcome is because of the lowerrealization from auction of 2G spectrum thus far. Innon-debt capital receipts, there is significant shortfallas of April-December 2012 on account ofdisinvestment receipts, as only ̀ 8,178 crore of thebudgeted amount of ` 30,000 crore has beenrealized. Thus the overall outcome in terms of non-debt receipts was ̀ 5,86,424 crore in April-December2012, which is 60.0 per cent of the BE, indicatingthe stiff challenge in the fourth quarter of the currentfiscal for better marksmanship.

Table 3.7 : Central Government FinancesBudget April-December Col.(4) as Per cent

Estimates % of (2) change2012-13 2011-12 2012-13 2012-13 over 2011-12

(BE) Col.(4) over (3)(1) (2) (3) (4) (5) (6)

( `̀̀̀̀ crore) 1. Revenue receipts [(ii)+(iii)] 935685 498491 570536 61.0 14.5

(i) Gross tax revenue 1077612 592348 681345 63.2 15.0(ii) Tax (net to Centre) 771071 420414 484156 62.8 15.2(iii) Non-tax revenue 164614 78077 86380 52.5 10.6

2. Capital receipts 555241 397870 420587 75.7 5.7(i) Recovery of loans 11650 14115 7710 66.2 -45.4(ii) Other receipts 30000 2743 8178 27.3 198.1(iii) Borrowings and other Liabilities 513590 381012 404699 78.8 6.2

3. Total receipts (1+2) 1490925 896361 991123 66.5 10.6 4. Non-Plan expenditure [(i)+(ii)] 969900 619457 695233 71.7 12.2

(i) Revenue account 865596 550692 625598 72.3 13.6of which:Interest payments 319759 179429 201959 63.2 12.6Major subsidies 179554 104181 166824 92.9 60.1Pensions 63183 40454 44839 71.0 10.8

(ii) Capital account 104304 68765 69635 66.8 1.3 5. Plan expenditure (i)+(ii) 521025 276904 295890 56.8 6.9

(i) Revenue account 420513 233903 242975 57.8 3.9(ii) Capital account 100512 43001 52915 52.6 23.1

6. Total expenditure [(4)+(5)=(i)+(ii)] 1490925 896361 991123 66.5 10.6(i) Revenue expenditure 1286109 784595 868573 67.5 10.7

of which:Grants for creation of capital assets 164672 84149 74283 45.1 -11.7

(ii) Capital expenditure 204816 111766 122550 59.8 9.67. Revenue deficit 350424 286104 298037 85.1 4.28. Effective revenue deficit 185752 201955 223754 120.5 10.89. Fiscal deficit 513590 381012 404699 78.8 6.2

10. Primary deficit 193831 201583 202740 104.6 0.6

Source : Controller General of Accounts, Ministry of Finance.



EXPENDITURE TRENDS

3.29 Given the large unmet minimum needs ofdevelopment, and factoring in the resourceavailability, the annual budgets estimate theexpenditure to be incurred for the year with dueconsideration to the level of fiscal deficit that isrequired under the FRBM mandate. Rapid reductionin expenditure as part of fiscal consolidation isconstrained by the level of committed expenditureon interest payments, defence, civil service pay andpensions, etc., which appropriate large part of therevenue receipts on the one hand, and the need tostep up development expenditure that is so criticalfor raising the level of welfare of the masses on theother. Thus the annual budget has to maintain adelicate balance between the need to reduce theexpenditure that is perceived as non-developmental,given the structural rigidities in the key expenditurecomponents and the needs for raising the levels ofdevelopment expenditure for inclusive growth. It isin this context successive budgets have focusedon reprioritization of expenditure.

3.30 In the post-FRBM period prior to the globalcrisis, total expenditure as a proportion of GDP wasbrought down from 15.4 per cent in 2004-5 to 13.6per cent in 2006-7. Following the global crisis andthe fiscal stimulus that followed, this proportion rosein excess of 15.7 per cent in 2008-9 and 15.8 percent in 2009-10. Notwithstanding the significantfiscal consolidation achieved in 2010-11 when thestimulus measures were partially rolled back, totalexpenditure as a proportion of GDP was placed at15.4 per cent, which was possible due to the one-off nature of surge in non-tax revenues from 3G/BWA telecom spectrum auction/proceeds as wellas high levels of nominal GDP. Going forward, fiscalmarksmanship in expenditure will depend on theemerging trends in key components that arediscussed in the following paragraphs.

SUBSIDIES

3.31 As indicated earlier, while the Budget for2011-12 had estimated total expenditure to becontained at 14.0 per cent of GDP, there was anovershooting on account of the high global oil pricesand the insufficient pass through to domestic oiland fertilizer prices. The overshooting of expenditureon subsidies was also because of the accountingchanges which placed all subsidies 'above the line’.

The Budget for 2012-13 estimated growth in totalexpenditure at 13.1 per cent over 2011-12 (RE) andsought to restrict expenditure on subsidies to 2 percent of GDP. As against a provision of ̀ 23,640 crorein 2011-12 for oil subsidies, the Budget for 2012-13provisioned an amount of ̀ 43,580 crore assuminga certain level of global crude oil price. It must benoted that oil subsidies are paid to the oil marketingcompanies (OMC) on a calendar-year basis becauseonly after quarterly results are declared is thesubsidy released.

3.32 In the event, the Indian basket crude oil was$107.52 per bbl (April-December) in 2012 and evenwith the pass through effected in the course of theyear, under-recoveries of OMCs surged and wereestimated at ̀ 1,24,854 crore during April-December2012-13. As the bulk of the under-recoveries isaccounted for by two subsidized products, viz. dieseland LPG, the government raised diesel prices by` 5 per litre and capped the subsidized cylinders atsix per connection per year in September 2012. Withcontinued rise in prices, on January 17, 2013 thegovernment further permitted OMCs to raise dieselprices in small measures periodically. However, inorder to protect household budgets, it simultaneouslyraised the annual LPG cap from six to nine cylindersper connection.

3.33 The high level of global crude oil prices alsohas a significant bearing on the level of fertilizersubsidies because it is not only a key input asfeedstock, but also because there is inadequatepass through in urea (the major domestic fertilizer)prices. Subsidy on fertilizers had increasedsubstantially from ̀ 32,490 crore in 2007-8 to reach` 67,199 crore in 2011-12 (RE). It is budgeted at` 60,974 crore in 2012-13. The government hasbeen calibrating pricing policies to address the issueof burgeoning fertilizer subsidies. One of theimportant decisions taken was to fix per tonnesubsidy on key non-nitrogenous fertilizers, therebylimiting the increase in subsidy outgo to the extentof increase in consumption.

3.34 Another major subsidy outgo in recent years,growing at an annual average rate of 25.4 per centin the last five years ending 2011-12, is on accountof food. While the targeted public distribution system(TPDS) accounts for the bulk of the food subsidyoutgo, there are other welfare schemes under whichfood subsidy is provided. A part of the subsidy outgo


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Box 3.4 : Direct Benefit Transfer (DBT)The DBT plan was introduced on 1 January 2013 with seven schemes in 20 districts. India has embarked on a DBT schemein selected districts wherein it has been envisaged that benefits such as scholarships, pensions, and MGNREGA (MahatmaGandhi National Rural Employment Guarantee Act) wages will be directly credited to the bank or post office accounts ofidentified beneficiaries. The DBT scheme will not substitute entirely for delivery of public services for now. It will replaceneither food and kerosene subsidies under the TPDS nor fertilizer subsidies. The DBT is designed to improve targeting,reduce corruption, eliminate waste, control expenditure, and facilitate reforms. Electronic transfer of benefits is a simpledesign change and transfers that are already taking place through paper and cash mode will now be done through electronictransfers. This has been enabled by rapid roll out of Aadhar (Unique Identity) now covering 200 million people and rapidlygrowing to cover 600 million (nearly half of our population), with the National Population Register covering the other halfof the populace. The DBT in tandem with such unique identification will ensure that the benefits reach the target groupsfaster and minimize inclusion and exclusion errors as well as corruption that are associated with manual processes.

also owes to the carrying cost of the buffer stock,which has mounted in recent years. In terms of themerits of subsidization, priority needs to be accordedto food subsidy in view of the under-consumption ofbasic food by the poor and the extent of malnutritionin the country. The government has sought to correctthis through the National Food Security Act(see Chapter 8), though concerns have beenexpressed that this will lead to a higher subsidyoutgo. However, as indicated earlier, it is a part ofthe challenge of prioritization to provide for this basicminimum need even as other items of expenditureare minimized. Further, there is need for bettertargeting of subsidies and for reducing leakagesinvolved in their delivery. Direct benefit transfer (DBT)(Box 3.4) is one such initiative.

INTEREST PAYMENTS

3.35 The cumulative impact of the level of deficitand debt is reflected in the interest payments outgo.As a proportion of GDP, interest payments fell inthe post FRBM period and have continued to below at around 3.1 per cent in recent yearsnotwithstanding the rise in fiscal deficit. A part ofthis owed to lower growth in interest payments vis-à-vis nominal GDP. As against an average annualgrowth of 12.7 per cent in interest payments in thelast five years ending 2011-12, annual averagenominal GDP growth was 15.9 per cent. It would beinstructive to note that the base for interest paymentsis the cumulative debt in the previous year plus theincremental assumption of debt in the current year.The average cost of borrowing thus measured isplaced at 7.9 per cent in 2011-12 (RE) and wasbudgeted to remain at the same level in 2012-13(Table 3.8)

PAY ALLOWANCES AND PENSION

3.36 Pay and allowances constituted 0.9 per centof GDP in 2007-8, rising to 1.4 per cent of GDP in2009-10 on account of the implementation of the

Table 3.8 : Interest on Outstanding InternalLiabilities of Central Government

Outstanding Interest AverageInternal on Cost of

Liabilities Internal Borrowings(end-March) Liabilities (per cent

( `̀̀̀̀ crore) per annum)

2004-5 1603785 105176 7.2 2005-6 1752403 111476 7.0 2006-7 1967870 128299 7.3 2007-8 2247104 149801 7.6 2008-9* 2565991 170388 7.6 2009-10 2874683 192567 7.5 2010-11 3212521 212707 7.4 2011-12(RE) 3738151 253995 7.9 2012-13(BE) 4284660 296940 7.9

Source: Union Budget documents. Notes: * Excludes ` 563 crore towards premium on

account of domestic debt-buyback schemeand prepayment of external debt.

1. Average cost of borrowing is thepercentage of interest payment in year ‘ t’to outstanding liabilities in year ‘t-1’.

2. Outstanding internal liabilities excludeNational Small Savings Funds (NSSF) loansto states,with no interest liability on the partof the centre.

3. The figures for interest payments reportedin the earlier issues may differ as thesefigures are net of interest payments onNSSF paid by the government since 1999-2000, i.e. the constitution of the NSSF.



award of the Sixth Central Pay Commission. At1.1 per cent of GDP in 2011-12 (BE), there has beensome moderation. Similarly, pension constituted 0.5per cent of GDP in 2007-8 and rose to 0.9 per centin 2009-10; it is placed at 0.6 per cent in 2011-12. Alonger time trend analysis reveals that growth inpensions was very modest prior to 2004-5 andsubsequently picked up due to the impact of thecontributory scheme introduced for fresh entrantsto government service in addition to the outgo underthe earlier pension scheme with undefinedcontribution. In tandem with pay and allowances,pensions also grew sharply in 2008-9 and 2009-10,reflecting the impact of the Sixth Pay Commission.

CENTRAL PLAN OUTLAY

3.37 Plan outlay comprises gross budget support(GBS) for Plan (central Plan plus central assistanceto states/ union territories [UTs]) and internal andextra budgetary resources of the central public-sector enterprises (CPSEs). The Twelfth FiveYearPlan envisages GBS of 5.25 per cent of GDP. TheBudget for 2012-13 placed Central Plan outlay at` 6,51,509 crore as against ̀ 5,58,172 crore in 2011-12 (RE). GBS for Plan is placed at ̀ 3,91,027 crorein BE 2012-13.

3.38 Broad sector-wise, the following are theallocations as a proportion of the total outlay: energy(23.8 per cent); social services (27.5 per cent);transport (19.2 per cent); communication (2.4 percent); rural development (7.8 per cent); agricultureand allied activities (2.7 per cent); and irrigation andflood control (0.2 per cent). Central assistance tostate and UT plans is placed at ̀ 1,29,998 crore inBE 2012-13. Reprioritization of expenditure from non-Plan to Plan would be critical in meeting theproposed Twelfth Plan outlay.

SUPPLEMENTARY DEMANDS FORGRANTS

3.39 Given the constitutional provision that noexpenditure can be incurred without Parliamentarysanction, additionalities of expenditure over BE haveto be made through supplementary demands forgrants. Supplementary demands for grants arise onaccount of two factors, viz. fresh proposals that werenot envisaged at the time of the BE and the additionalexpenditure arising out of underprovisioning in theBE under various heads. A part of the additionalitiesare met through re-appropriations from one budget

head to another, which implies no net cash outgo,and through additional demands entailing cashoutgo. The extent of the latter has implications foroverall fiscal marksmanship.

3.40 In recent years, underprovisioning ofpetroleum and fertilizer subsidies has been animportant reason for supplementary demands forgrants with a cash outgo. In 2011-12, out of thethree supplementary demands for grants with cashoutgo that were presented, about 60.7 per cent wason account of petroleum and fertilizer subsidies. In2012-13, only one supplementary demand for grantshas been presented. Of the demands involving netcash outgo of ` 30,804.13 crore, ` 28,500 crorewas the outgo on account of compensation for theunder-recoveries of the OMCs and ̀ 2,000 crore onaccount of equity infusion for the Turn Around Planand Financial Restructuring Plan of Air India.

ECONOMIC AND FUNCTIONALCLASSIFICATION

3.41 While the conventional analysis of the trendsin expenditure, revenue, and deficits is useful forunderstanding the trends in public finances, themacroeconomic impact of fiscal policies is bestunderstood in terms of a national accountingframework. But the latter comes out with some timelag. It is here that the economic and functionalclassification of the central government Budget isuseful. Such an analysis of the central governmentBudget indicates that out of the total expenditure of` 12,88,763 crore in 2011-12 (RE), consumptionexpenditure was ̀ 2,56,898 crore and expenditureon gross capital formation ` 70,050 crore(Appendix Table 2.21). Financial investments andloans to the rest of the economy were ` 46,149crore. With the rest of the expenditure being transferpayments, such financial transfers were 71.0 percent of total expenditure. In 2012-13 (BE), out oftotal estimated expenditure of ` 14,97,636 crore,consumption expenditure is placed at ` 2,90,124crore and gross capital formation ` 94,906 crore.Transfer payments to the rest of the economy at` 10,10,950 crore constituted 67.5 per cent of thetotal expenditure.

3.42 In terms of classification by functional heads,social and economic services (broadly covering thetotal development outlays) at ` 6,41,944 croreconstituted 42.9 per cent of the total expenditure of` 14,97,636 crore in 2012-13 (BE). Expenditure on


73Public Finance

general services is estimated at ` 3,49,199 crore,constituting 23.3 per cent of the total. Such itemsas statutory grants-in-aid to states, non-Plan grantsto UTs, food and other consumer subsidies, intereston public debt, pension, and aid to other nationsconstitute the unallocable category accounting for33.8 per cent of the total expenditure. The salientfeature of the economic and functional classificationof the Central Budget 2012-13 is the estimatedgrowth in capital formation (including financialassistance for capital formation) which is placed at22.9 per cent and growth of 16.2 per cent in socialservices in 2012-13 (BE) over 2011-12 (RE),indicating the thrust of the Budget on higherinvestment and an inclusive development agenda.

EXPENDITURE OUTCOME IN 2012-133.43 As against implied year-on-year growth of 14.8per cent envisaged by BE 2012-13 (over provisionalactuals of 2011-12), growth in total expenditure inApril-December 2012 has been 10.6 per cent only(see Table 3.7). Non-Plan revenue expenditure inApril-December 2012 is placed at 72.3 per cent ofBE, which is well below the five-year average of 77.7per cent. Similarly expenditure on both Plan revenueas well as Plan capital expenditure in April-December2012 is well below the five-year average asproportions of BE. However, major subsidies haveburgeoned in April-December 2012 to reach a figureof ` 1,66,824 crore (92.2 per cent of BE). Theexpenditure restraint has helped keep deficits lowerin April-December 2012.

DEFICIT OUTCOME IN 2012-133.44 The Budget for 2012-13 estimated a deficitlevel of ̀ 5,13,590 crore. The net outcome of slippagein non-debt receipts and expenditure restraint fedinto the outcome in terms of the desired indicatorsof revenue deficit as well as fiscal deficit in April-December 2012. As a proportion of BE, fiscal deficitis placed at 78.8 per cent, significantly below thefive-year average of 85.9 per cent and last year’slevel of 92.3 per cent. Similarly, revenue deficit isplaced at 85.1 per cent, well below the level achievedin the recent past. However, the indicator effectiverevenue deficit is placed at 120.5 per cent in April-December 2012. Though it is below last year’s levelin the same period, it is a slippage and owes tolower outgo of grants for creation of capitalassets.

GOVERNMENT DEBT

3.45 The high levels of fiscal deficit in the post-crisis period added to the overall debt burden of thecentral government. Prolonged fiscal deficits leadto accumulation of debt beyond levels sustainablefor an economy and can result in higher real andnominal interest rates, slower growth in capitalformation, and potentially lower the rate of outputgrowth. The outstanding liabilities of the centralgovernment were placed at ` 44,68,714 crore,equivalent of 49.8 per cent of GDP at end-March2012 (Table 3.9). As a proportion of GDP, outstandingliabilities (adjusted) of the centre peaked at 67.0per cent in 2002-3 and have fallen subsequentlynotwithstanding the rise in fiscal deficit in the post-crisis years. This is on account of the fact that growthin incremental assumption of liabilities has beenlower than that of nominal GDP and the debt toGDP ratio dynamics is aided by the differentialbetween nominal GDP growth and nominal interestrates, which makes it possible to achieve a greaterreduction through a given primary balance.

3.46 The total liabilities for the Government of Indiainclude debt and liabilities accounted for in theConsolidated Fund of India (technically defined aspublic debt) as well as liabilities accounted for inthe public account. Public debt constitutes 76.3 percent of total liabilities at end March 2012. It is furtherclassified into internal and external debt. Internaldebt, constituting 90.9 per cent of public debt, largelyconsists of fixed tenor, fixed coupon dated securities(72.1 per cent) and treasury bills (10.2 per cent).State governments are not allowed to directly borrowexternally hence their entire debt is domestic. Overtime, there is a compositional shift towardmarketable debt, while the public account liabilitieshave seen a commensurate decline. The share ofmarketable debt to total internal liabilities, whichwas about 30 per cent in the beginning of the 1990s,increased to 40 per cent in the beginning of the2000s and is budgeted to increase to 67.5 per centby end-March 2013. The share of public accountliabilities on the other hand is estimated to declineto 22.8 per cent in 2012-13 (BE) from about 30 percent in 2001-2 and about 46 per cent in the beginningof the 1990s.

3.47 A greater dependence on domestic debtinsulates the debt portfolio from volatility ininternational capital markets. It also minimizescurrency risk. Apart from this, internal debt of the



Government of India has the following favourablefeatures which provide some comfort.

(a) Weighted average maturity of outstandinggovernment securities at 9.8 years is highcompared to international standards. At end-March 2012, the proportion of debt maturing inless than one year was only 3.5 per cent and30.2 per cent of outstanding stock had a residualmaturity of up to five years. This implies thatover the next five years, on an average, about6.0 per cent of outstanding stock needs to berolled over every year. Thus the rollover risk inthe debt portfolio remained low.

(b) Most of the public debt in India is at fixedinterest rates. Of the total outstanding datedsecurities, only 1.8 per cent was on floatingrate. Thus interest payments are largelyinsulated from interest rate volatility, impartingstability to the Budget.

(c) The average cost of the debt (interest payments/debt ratio) and interest payments as apercentage of revenue receipts are on a seculardecline, though some rise was seen in the pasttwo years. Ratio of interest payments torevenue receipts has declined to around 36 per

cent in 2011-12 from about 50 per cent in thebeginning of the 2000s.

(d) A relatively stable weighted average yield ofprimary issuance indicates stability in interestpayments/revenue receipts and interestpayments/debt ratios, pointing towards thesustainability of the debt in the country.

3.48 Government debt could also arise from theassumption of l iabilit ies associated withrecapitalizing public-sector enterprises including thebanking sector. It is, therefore, customary to lookat their finances.

PERFORMANCE OF DEPARTMENTALENTERPRISES OF THE CENTRALGOVERNMENT

Railways3.49 The Twelfth Five Year Plan (2012-17) envisionsan integrated approach for the transport sector as awhole. It states that the vision for the transport sectorshould be guided by a modal mix that will lead to anefficient, sustainable, economical, safe, reliable,environmentally friendly, and regionally balancedtransport system. The rail network would also haveto develop a strategy to be part of an effective multi-

Table 3.9 : Outstanding Liabilities of the Central GovernmentEnd-March

2007-8 2008-9 2009-10 2010-11 2011-12 2012-13(RE) (BE)

(As per cent of GDP) 1. Internal liabilities 54.6 53.9 52.4 48.5 47.9 48.3

a) Internal debt# 36.1 35.9 35.9 34.2 35.7 37.3i) Market borrowings 22.1 23.8 27.0 26.6 27.9 29.8 ii) Others 13.9 12.1 9.0 7.6 7.7 7.5

b) Other internal liabilities 18.6 18.1 16.5 14.3 12.2 11.0 2 External debt(outstanding)* 2.2 2.2 2.1 2.0 1.9 1.8 3 Total outstanding liabilities 56.9 56.1 54.5 50.5 49.8 50.1

Memorandum items a) External debt @ 4.2 4.7 3.8 3.6 3.6 3.3b) Total outstanding

liabilities(adjusted)** 58.9 58.6 56.3 52.1 51.5 51.7

Sources : Union Budget documents, Controller of Aid Accounts and Audit and Reserve Bank of India.# Internal debt includes net borrowing of `̀̀̀̀ 29,062 crore for 2005-6, `̀̀̀̀ 62,974 crore for 2006-7,

`̀̀̀̀ 1,70,554 crore for 2007-8, `̀̀̀̀ 88,773 crore for 2008-9, `̀̀̀̀ 2,737 crore for 2009-10, and `̀̀̀̀ 20,000 crore for2011-12(BE) under the Market Stabilisation Scheme.

* External debt figures represent borrowings by central government from external sources and arebased upon historical rates of exchange.

@ Converted at year end exchange rates. For 2006-7, the rates prevailing at the end of March 2007, for2007-8, the rates prevailing at the end of March 2008, and so on.

** Internal liabilities and external debt (converted at year end exchange rates).Note : The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-5 series.


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modal transport system. The Twelfth Plan identifiessafety, modernization, and capacity augmentationas the focus areas, for which initiatives are underwayin Indian Railways to supplement its internalresources judiciously through public-privatepartnerships (PPP), cost sharing with stategovernments and other stakeholders, and marketborrowings.

3.50 Freight loading by Indian Railways duringfiscal 2011-12 was placed at 969.8 million tonnesagainst 921.7 million tonnes in 2010-11, registeringan increase of 5.2 per cent with an incrementalloading of 48.1 million tonnes over 2010-11 levels.The freight traffic target for 2012-13 (BE) has beenfixed at 1,025 million tonnes, an increase of 5.7 percent over the previous year. During April-November2012, Indian Railways has carried 647.11 milliontonnes of revenue-earning freight traffic. The freightcarried shows an increase of 29.06 million tonnesover the freight traffic of 618.05 million tonnesactually carried during the corresponding period ofthe previous year, translating into an increase of 4.7per cent.

3.51 Freight earnings at ̀ 69,547.59 crore during2011-12 exceeded the revised target by ̀ 927 crore,registering a growth of 10.7 per cent over 2010-11.Passenger earnings (including other coachingearnings) during 2011-12 stood at ̀ 30,962.96 croreas against ` 28,263 crore in 2010-11, an increaseof 9.6 per cent. The overall traffic revenue for2011-12 at ` 1,04,153 crore registered a growth of10.2 per cent over 2010-11. Taking into accountfurther accumulation of ` 43 crore to the trafficoutstanding, the gross traffic receipts of theRailways for 2011-12 stood at ` 1,04,110 crore.Gross traffic receipts for 2012-13 have been budgetedat ̀ 1,32,552 crore.

3.52 Ordinary working expenses at ` 74,537.4crore during 2011-12 show an increase of 9.4 percent over 2010-11. The total working expensesincluding appropriations to the Depreciation ReserveFund and Pension Fund at ` 98,667.41 crorerecorded an increase of 10.3 per cent over 2010-11.Ordinary working expenses are budgeted at ̀ 84,400crore for 2012-13 while the total working expensesare ̀ 1,12,400 crore.

3.53 Taking into account the net variation of themiscellaneous receipts and miscellaneousexpenditure, Railways’ net revenue in 2011-12 was` 6,781.60 crore. After fully discharging the dividend

liability of ` 5,656.03 crore for the fiscal, Railwaysduring 2011-12 generated an excess of around`1,125.57 crore. Dividend liability during 2012-13has been budgeted at ` 6,676 crore. There was amarginal deterioration of the operating ratio(percentage of total working expenses to gross trafficearnings) of the Railways, which stood at 94.9 percent in 2011-12 as against 94.6 per cent in2010-11. The operating ratio for 2012-13 has beentargeted at 84.9 per cent in the Rail Budget. Thenet revenue as a proportion of capital-at-charge andinvestment from Capital Fund for the fiscal stood at4.2 per cent in 2011-12. The target for 2012-13 (BE)is 12.1 per cent.

3.54 The Plan Outlay for 2011-12 (provisional) stoodat ` 45,499 crore including internally generatedresources of ̀ 8,934 crore (i.e. 19.6 per cent of thePlan outlay) and market borrowings of ̀ 15,228 crore(i.e. 33.5 per cent of the Plan outlay) by the IndianRailway Finance Corporation (IRFC), which alsoincludes borrowings of ` 108 crore for Rail VikasNigam Limited. The Annual Plan outlay for 2012-13has been budgeted at ` 60,100 crore, which is thehighest ever Plan investment. The Plan has beenbudgeted to be financed through GBS of ` 24,000crore (40.0 per cent), internal resources of ̀ 18,050crore (30.0 per cent), ̀ 2,000 crore from the RailwaySafety Fund (3.3 per cent) and extra-budgetaryresources of ̀ 16,050 crore (26.7 per cent) includingmarket borrowings of ̀ 15,000 crore through IRFC.

Department of Posts3.55 The gross receipts in 2011-12 of theDepartment of Posts were placed at ` 7,899.35crore. The gross and net working expenses duringthe year were ` 14,163.91 crore and ` 13,705.27crore respectively, yielding a deficit of ` 5,805.92crore. In the current fiscal as per BE 2012-13, grossreceipts are budgeted to go up to ̀ 7,793.31 crorewith gross and net working expenses estimated at` 14,379.71 crore and ̀ 13,714.66 crore respectively.The deficit is projected to be ̀ 5,921.35 crore.

3.56 The government has approved the ITModernization Project of the Department of Postsfor computerization of all the non-computerized postoffices, mail offices, administrative and other offices,establishment of required IT infrastructure, anddevelopment of required software applications. Thecontinuation of the IT modernization project involvingoperating and maintenance (O&M) costs of ̀ 4,909.00crore has been approved on 22 November 2012.



Broadcasting3.57 The expenditure of Prasar Bharati in 2011-12was ̀ 3,340.57 crore (provisional) excluding chargeson account of space segment and spectrum chargesand interest and depreciation costs. The totalrevenue earned in 2011-12 was ` 1,409.54 crore(subject to reconciliation).

3.58 The government has proposed severalschemes for the Twelfth Five Year Plan to beimplemented through All India Radio (AIR) andDoordarshan which include the scheme forDigitalization of Transmitters, Studios, andConnectivity. The scheme inter alia envisagesdigitalization of 98 studios and connectivity andinstallation of 100-watt FM Digital CompatibleTransmitters at 100 locations. As such, the schemefor Digitalization of the AIR/Doordarshan Networkcontinues to be one of the Major Thrust Areas of theTwelfth Plan. Auction of 839 additional private FMchannels in 294 cities is also likely to be completedin 2013-14. An allocation of ` 2,047.35 crore hasbeen made in 2012-13 (BE) to cover the resource

gap in the operating cost of Prasar Bharati.Inaddition, as part of the financial restructuringpackage for Prasar Bharati, the government hasrecently approved various measures which includemeeting 100 per cent expenses towards salary andsalary-related establishment expenses during thenext five years from 2012-13 to 2016-17 while allother items of operating expenses are to be borneby Prasar Bharati from its internal resources.

STATE-LEVEL FINANCES3.59 While there has been some stress in centralgovernment finances in recent years, the financesof states are in fine fettle. The combined gross fiscaldeficit of states did not exceed 3.0 per cent of GDPeven in the years of global crisis. After reaching alevel of 1.5 per cent of GDP in 2007-8, the fiscaldeficit of states rose to 2.9 per cent in 2009-10 buthas moderated to 2.1–2.3 per cent subsequently(Table 3.10). As a proportion of GDP, tax receiptsmoderated in 2008-9 and 2009-10 and together withstable non-tax receipts helped in fiscal consolidation

Table 3.10 : Receipts and Disbursements of State and Consolidated General Government

Item 2007-8 2008-9 2009-10 2010-11 2011-12 2012-13 (RE) (BE)

(As per cent of GDP)State governmentsI. Total receipts (a+b) 15.4 15.8 15.6 15.1 15.9 16.3

a) Revenue receipts (1+2) 12.5 12.3 11.9 12.0 12.7 13.31. Tax receipts 8.8 8.6 8.2 8.7 9.0 9.42. Non-tax receipts 3.7 3.8 3.7 3.3 3.7 3.8

b) Capital receipts 2.8 3.5 3.7 3.1 3.2 3.0 II. Total disbursements 15.1 15.7 15.7 14.9 16.0 16.3

a) Revenue 11.6 12.1 12.3 12.0 12.7 12.8b) Capital 3.2 3.3 3.1 2.7 2.9 3.2c) Loans and advances 0.3 0.3 0.3 0.2 0.4 0.3

III. Revenue deficit -0.9 -0.2 0.5 0.0 -0.1 -0.4IV. Gross fiscal deficit 1.5 2.4 2.9 2.1 2.3 2.1General governmentI. Total receipts (a+b) 27.2 27.8 28.5 27.6 28.3 28.3

a) Revenue receipts (1+2) 21.3 19.8 18.7 20.3 19.5 20.71. Tax receipts 17.6 16.5 15.2 16.0 16.2 17.12. Non-tax receipts 3.7 3.4 3.5 4.2 3.3 3.5

b) Capital receipts 5.9 8.0 9.8 7.4 8.8 7.6II. Total disbursements 26.4 28.4 28.6 27.5 28.1 28.3

a) Revenue 21.5 24.1 24.4 23.5 23.8 23.7b) Capital 4.5 3.9 3.8 3.4 3.6 4.1c) Loans and advances 0.4 0.4 0.4 0.6 0.6 0.5

III. Revenue deficit 0.2 4.3 5.7 3.2 4.3 3.1

IV. Gross fiscal deficit 4.0 8.3 9.3 6.9 8.1 7.2

Source: Reserve Bank of India.Notes : (1) The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-5 series.

(2) Disinvestment proceeds are inclusive of miscellaneous capital receipts of the states.(3) Negative (-) sign indicates surplus in deficit indicators.(4) Capital receipts include public accounts on a net basis.(5) Capital disbursements are exclusive of public accounts.


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notwithstanding a small rise in 2011-12 (RE). Withthe exception of 2009-10, the combined position ofstates in terms of revenue deficit has been one ofsurplus. Besides, what is noteworthy is that therehas been an improvement in the quality of expenditurewith a rise in capital expenditure to GDP ratio anddevelopment expenditure. However, as with manyother economic indicators, there are large inter-statevariations in the attainments in terms of fiscaloutcome. Another concern arising from statefinances is that there is incomplete information onextra-budget activities and quasi-fiscal activities.The RBI’s study of state budgets 2012-13 hasindicated that notwithstanding the information gap,fiscal transparency at state government levels hasincreased. One of the main problems with states’finances is in the financial health of the power

distribution companies, which continue toaccumulate losses estimated at ` 1,90,000 croreat end-March 2011. This is mainly on account ofnon-revision of tariffs, subsidy arrears, highaggregate and technical losses and the high costof buying short-term power. Thus, continued reforminitiatives are critical for maintaining sound financesof the states.

CONSOLIDATED GENERALGOVERNMENT3.60 As indicated earlier, fiscal deficit of the centrewidened from 4.8 per cent of GDP in 2010-11 to 5.9per cent in 2011-12 (RE). With the fiscal deficit ofstates exhibiting a modest deterioration to 2.3 percent of GDP, the fiscal outcome in terms of centreand states combined was placed at 8.1 per cent in

Box 3.5 : Terms of Reference of 14th Finance CommissionThe following are the broad Terms of Reference and the matters to be taken into consideration by the 14th Finance Commissionin making the recommendations:1. (i) the distribution between the union and states of the net proceeds of taxes which are to be, or may be, divided between

them under Chapter I, Part XII of the Constitution and the allocation between the states of the respective shares ofsuch proceeds;

(ii) the principles which should govern the grants-in-aid of the revenues of the states out of the Consolidated Fund ofIndia and the sums to be paid to the states which are in need of assistance by way of grants-in-aid of their revenuesunder article 275 of the Constitution for purposes other than those specified in the provisos to clause (1) of thatarticle; and

(iii) measures needed to augment the Consolidated Fund of a state to supplement the resources of the panchayats andmunicipalities in the state on the basis of the recommendations made by the Finance Commission of the state.

2. The Commission has been mandated to review the state of finances, deficit, and debt levels of the union and states andsuggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth includingsuggestions to amend the FRBMAs currently in force. The Commission has been asked to consider and recommendincentives and disincentives for states for observing the obligations laid down in the FRBMAs.

3. In making its recommendations, the Commission inter alia is required to consider: the resources of the central governmentand the demands on the resources of the central government; the resources of the state governments and demands onsuch resources under different heads, including the impact of debt levels on resource availability in debt-stressed states;the objective of not only balancing the receipts and expenditure on revenue account of all the states and the union butalso generating surpluses for capital investment; the taxation efforts of the central government and each state governmentand the potential for additional resource mobilization; the level of subsidies required for sustainable and inclusivegrowth and equitable sharing of subsidies between the central and state governments; the expenditure on the non-salarycomponent of maintenance and upkeep of capital assets and the non-wage-related maintenance expenditure on Planschemes to be completed by 31 March 2015 and the norms on the basis of which specific amounts are recommended forthe maintenance of capital assets and the manner of monitoring such expenditure; the need for insulating the pricing ofpublic utility services like drinking water, irrigation, power ,and public transport from policy fluctuations throughstatutory provisions; the need for making public-sector enterprises competitive and market oriented; listing anddisinvestment; relinquishing of non-priority enterprises; the need to balance management of ecology, environment, andclimate change consistent with sustainable economic development; and the impact of the proposed goods and servicestax on the finances of the centre and states and the mechanism for compensation in case of any revenue loss.

4. The Commission is required to generally take the base of population figures as of 1971 in all cases where population isa factor for determination of devolution of taxes and duties and grants-in-aid; however, the Commission may also takeinto account the demographic changes that have taken place subsequent to 1971.

5. The Commission is to review the present public expenditure management systems in place including budgeting andaccounting standards and practices; the existing system of classification of receipts and expenditure; linking outlays tooutputs and outcomes; best practices within the country and internationally and to make appropriate recommendationsthereon.

6. The Commission is to review the present arrangements as regards financing of Disaster Management with reference tothe funds constituted under the Disaster Management Act 2005(53 of 2005) and make appropriate recommendationsthereon.

7. The Commission is to indicate the basis on which it has arrived at its findings and make available the state-wiseestimates of receipts and expenditure.



2011-12 (RE) as against 6.9 per cent in 2010-11(Table 3.10). In 2012-13 (BE), fiscal deficit isbudgeted to come down to 7.2 per cent of GDP.While there is a likely slippage of 0.2 percentagepoint in terms of the centre’s target, the over-performance in states might help in achieving thebudgeted levels in the overall fiscal outcome in2012-13.

3.61 The 14th Finance Commission wasconstituted on 2 January 2013 under theChairmanship of Dr Y.V.Reddy, former RBI Governor.Other members of the commission are (i) ProfessorAbhijit Sen (ii) Ms Sushma Nath (iii) Dr M.GovindaRao (iv) Dr Sudipto Mundle. The Commission’smandate is detailed in Box 3.5.

OUTLOOK

3.62 It might be recalled that the Mid-YearEconomic Analysis 2012-13 sought to allay

concerns about the fiscal outcome for 2012-13through allusion to the measures taken andindicated that the fiscal deficit for the year would becontained at 5.3 per cent of GDP. The outcome inApril-December 2012 in terms of fiscal deficit broadlyindicates that this is likely to happennotwithstanding the significant shortfall in revenue.The overall shortfall in non-debt receipts could becontained with ongoing greater efforts at mobilizationand reforms already in place. The longer-termoutlook has already been outlined in terms of thefiscal consolidation roadmap leading to a fiscal deficitof 3.0 per cent of GDP in 2016-17. As indicatedearlier in the chapter, addressing the key fiscal riskof petroleum subsidies is critical in better fiscalmarksmanship. With the recent reforms in dieselprices and efforts at expenditure reprioritization, themedium-term fiscal consolidation plan is credibleand could yet again yield macroeconomic dividendsin terms of higher growth and price stability.


economic survey part3

Documents

basic customs duty

personal income tax

reverse charge mechanism

total working expenses

corporate income tax

current market prices

service tax attributable

immovable property service